Snap (SNAP 0.99%), the parent company of social media platform Snapchat, took a hard hit following its second‑quarter earnings release earlier this month. Shares tumbled, driven by worries about slowing growth, execution missteps, and a worsening net loss. But dig deeper, and the underlying narrative is more nuanced; there were a lot of positives in the report, too.
Revenue and users continue to grow at a robust rate, free cash flow has turned positive year over year, and new ad formats, such as sponsored Snaps, are demonstrating real engagement traction. Given the mix of good and bad in its underlying business and the stock's recent sell-off, it makes sense to check whether the shares have been pushed into oversold territory.
Let's look at what changed in the business and what it might mean for investors today.
Image source: Getty Images.
Momentum in key areas
Snap reported second-quarter revenue of $1.345 billion, marking a 9% gain from a year earlier. Further, the lifeblood of the company -- user activity -- performed exceptionally well.
Daily active users (DAUs) rose 9% to 469 million, while monthly active users (MAUs) climbed 7% to 932 million. Operating cash flow reached $88 million, and free cash flow came in positive at $24 million, a notable reversal from the previous year, when the company burned cash. Still, Snap posted a net loss of $263 million (wider than a net loss of $249 million in the year-ago quarter), and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) slid lower on a year-over-year basis to $41 million, underscoring that profitability remains out of reach.
An ad platform glitch -- where auction settings pushed some campaigns to clear at unusually low prices -- weighed on performance early in the quarter. Snap reversed the change mid-period, and management said that advertiser activity is recovering.
One of my favorite data points to support the bull case: On the diversification front, "other revenue" -- primarily from subscriptions like Snapchat+ -- grew 64% year over year, and Snapchat+ subscribers rose roughly 42%, nearing 16 million.
One of the quarter's most promising developments was sponsored Snaps -- video ads delivered directly into users' inboxes. Snap co-founder Evan Spiegel said in the company's second-quarter earnings call that after a user opens a sponsored Snap from their chat feed, they "exhibit significantly higher engagement per full-screen ad view, driving a 2x increase in conversion, a 5x increase in click-to-convert ratios and a 2x increase in website dwell times compared to other inventories. That signals a powerful new lever for monetizing deeply engaged users.
Given the company's fast-growing subscription business, advertising revenue growth trends after the glitch was addressed, and momentum in sponsored Snaps, management guided for continued top-line growth in Q3.
Valuation remains a concern
Despite a handful of promising trends at Snap, valuation remains troubling. The company has long leaned on equity dilution and stock-based compensation to fund growth. While Q2 did include a $243 million share repurchase (30 million shares), its stock-based compensation burden remains high. Full-year stock-based comp is still pegged north of $1.1 billion, even after recent downward revisions. Keep in mind that we're talking about a company with only a $12 billion market cap. Dilution continues to erode per-share value, even as Snap shows cash generation.
So while the sell-off may feel overdone, the stock hasn't quite yet fallen low enough to make it a bargain. Of course, I could be wrong. A potential bull case lies not in near-term profits but in optionality -- whether Snap can scale newer revenue streams, stabilize pricing, and get to a point where it doesn't need to regularly materially dilute shareholders.
Overall, Snap trades at a valuation that remains questionable given its history of dilution and heavy reliance on noncash compensation. But the emergence of fast-growing subscription revenue, sponsored Snaps, better cash flow, and an engaged user base make it extremely interesting -- worthy of a high spot on any investor's watchlist.
